Phantom of the Pits - Phantom's Chat

It's always difficult to
get a group of people together at a time and place and equally
difficult to get Phantom to be available to work on a specific
project especially when he is working on so many
already.
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We were able to set a time
and discuss various aspects of questions on trading of interest to
our traders. It often times seems that much of Phantom's insight is
more general when specific questions concerning his rules are
presented. I asked him about some of his trading as it would
pertain to long term and short term trading both. His answers were
that while you may travel 100, 1000 or several thousand miles it is
travel just the same as to whether you take a car, train or
airplane.
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Answers to your questions
may not be as timely as you wish but we will try to elaborate on
some of Phantom's aspects of trading as they refer to both long and
short term trading.
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ALS: Pop, give us some of
your observations on your reflections of the reception of your
trading rules since you presented them to the traders.
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Phantom of the Pits (POP):
Many remarks have been made as to the rules being more for short
term traders than long term. I would like to dispel that notion.
The big reason for that belief is that traders are still
OVERTRADING their account size. The rules work for both long term
and short term if over trading is not a problem.
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I have seen a couple of
posts, which are accurate in regard to, how large of a trade should
be made. I think most traders want to be short term traders or day
traders. It is a fact that trading futures requires prompt actions,
which leave the trader to feel that all trading should be short
term. Markets swing and reverse back and forth often in moves,
which can wipe out an account so fast if over trading is a problem.
Nothing will wipe out a trader faster.
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The rules are a must in
long term trading just as well as short term trading. If you have a
signal to enter a market and two weeks later the market is not
doing what you expected and you are still in the position you
should have used rule one and not rule two. You will not have added
to your position because it didn't prove you correct. By not
overtrading you may have been able to hold the position for two
weeks without going to an extreme of losing on the trade by big
time.
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Still if you have a
two-week position on because you are expecting the trend to
continue or develop you must approach the initial trade by not
overtrading to a point of having to lose on minor fluctuations. If
you overtrade you will be forced somewhere to pull the trade off at
an unfavorable situation and with a loss you had not counted on
taking.
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By using rule one with long
term trading you are far better off to under position with smaller
positions. It is rule two, which will make up for the smaller
positions in long term trading. In long term trading your window of
the position proving to be correct would perhaps be a little wider
and a longer time frame. While this longer-term time frame and
window may give you a greater chance of losing, you still have a
better position by not overtrading the position from the
start.
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Keep in mind that entry
signals are not always good entry points. That alone says not to
overtrade the position. You must also be prepared to pick a range
and not a price, which leads us back to not overtrading the initial
entry. This leads to rule two in allowing you the opportunity to
get larger once the position proves to be correct. We are talking a
wider window than most traders think about for rule two to work
properly in the long run.
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Much frustration develops
in trading when the initial position is overtraded. Each trade
should not make a difference in your account. The problem with that
statement is that each trade does make a difference to almost all
traders. If the trade makes a difference in your account then you
are going to allow the market to make decisions for you and that is
always inconsistent with good trading. Keep in mind too that the
statement is not saying that each trade should not be important in
your trading.
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I have seen the smallest
trade become significant to traders because they didn't use rule
one and remove the position once it failed to prove a good
position. The loss becomes larger and larger. Believe me that it
will make a difference if not protected properly. It is much easier
to follow the required rules if your plan has a plan for removal if
not proven to be a good position when your position is small and
not larger upon initial entry.
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I have had several email
indications from traders telling me what works for them. Good for
them as they have a plan and can use it correctly. It must be a
plan which you incorporate into your trading and it must work for
you. I can't stand to sweat or to swear for that matter and that is
what happens if you don't keep each initial entry insignificant
position wise. Rule one can stretch from minutes to weeks or months
but the important part is to know you must remove the position and
not leave it to the market when not proven correct.
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Don't worry about not
having a good size position on a big move because your plan has the
other side of the coin. Rule two always says to increase a proven
position and to do it correctly. What is correct for me may not be
correct for you because you may be more removed from the market
than I am.
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ALS: Pop, do you want to go
into detail more on long term trading with your rules?
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POP: Unfortunately I can't
narrow situations down for a specific plan for all situations. The
correct way to use the rules for long term trading is to always
keep in mind that small is certainly a key to success when used
with proper rules.
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I saw a post and please
forgive me for not remembering who posted it that the position
taken by that person is always going to be smaller than most but at
the end of the year they would have made more money than the larger
positioned trader. Yes, that statement is a correct one for several
reasons.
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Up front is the behavior
modification. A smaller position is kind to you in allowing the
proper response from yourself in protecting your account. Of course
there are times when being aggressive is required and that is where
my rule two comes into play for myself. As I have said before a
trader on the CBOT with a single letter acronym continues to
astonish me in his proper aggressive use of rule two. Not that he
uses my rule two specific but that he aggressively adds properly at
the proven points.
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I have observed many posts
over the past year and the "SMALL" secret is starting to get out.
There are ways of trading small. You certainly can trade MidAmerica
contracts with good results and you can with options into smaller
exposure in markets as long as the markets are liquid. Any futures
contract, which has options, can downsize your position exposure on
any exchange.
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What I want the smaller
trader to do is to be realistic about return expectations when
becoming long term traders. You won't start with ten grand and make
a million by being long term traders. Oh yes it is possible but you
are putting yourself at too much of a disadvantage to think you
will do it without making a full time effort and becoming more of a
day or short term trader. Even then it is remarkable if it can be
done.
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ALS: So mainly you are
saying that long term trading with your rules require you to be
small but aggressive at the proper times?
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POP: You aren't wrong! It
seems like a trick but it is not. You'll have to pull that sack out
of a sack and see there is actually something to it. Small can
always become larger but when you start larger you are actually
setting yourself up to have to become smaller somewhere in your
career. It is the sad truth.
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I have watched posts from
various traders and it's easy to see that many traders are
overtrading. I think the only complaint I have against the experts,
authors and researchers is that while they are making the effort to
help traders admirable, they must present the problem of
overtrading more clearly.
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Since I have walked the
road of trading and often observe various writers and experts I can
say that I believe they are usually on the right track but times
change and they can not always predict that change. It is not their
blame but the small trader must be aware and on top of it. The
small trader can recognize that change better if they are not so
large.
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I watched a mutual fund
trader come out of positions just yesterday as he believes the
market is not topping but that he is too large to get out when it
does top. Recognition of the situation is very important and to me
that is a very smart mutual fund to be in with your funds. Now for
the small trader it isn't always necessary to remove positions
before the reversal because of being too large. That to me is a
very big advantage for the small trader provided they have their
surprise side trade plan always in place.
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I want to point out another
major problem I see with what I have observed over the past year of
observation of the small trader.
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What is the one thing,
which can most likely change your odds in trading? If someone could
actually give you M.J.'s shoes that now allow you to jump five feet
higher, could you better play basketball?
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In trading we can have
those shoes. First we must think about being small from initial
entry because the position has not been proven. The only thing we
have upon entry is that we have a signal based on what has
happened. We know that the direction is pointing but not that the
direction will continue.
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Because we are small we
must have the plan to become larger (rule two) or we won't ever
exceed a 50/50 expectation in the long run.
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Where do we get the pair of
shoes? Secondly our efforts must be different than what we are
presently experiencing in expectations. Every trader who learns of
trading is expecting to make good sums of money. They also count on
that outcome.
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The expectation of making
good sums of money is WRONG in trading. The CORRECT EXPECTATION is
that you will have a large amount of losses. It is a fact! It is up
to the trader for the large amount of losses to be kept small or
they will certainly be large.
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I am not saying that you
can not expect to make large sums of money but that you should
never have that expectation in trading. The only expectation in
trading is that you should expect to take a large amount of
losses.
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Here comes your pair of
shoes that help you jump five feet higher!
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Your job as a trader is to
have a good plan for entry, adding, exit and use of good rules for
your protection from being removed from the trading arena. You must
not concentrate on how much money you can make or expect to make in
your trading. Your plan and objectives of your plan will give you
your proper signals and your rules will give you your proper
protection.
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(YOUR SHOES) You must
concentrate at all times on keeping your losses small and never on
what you expect to make but on what you expect to lose. The five
foot gains come when you don't expect them and they do come. They
come when you are concentrating on keeping your losses small at all
times.
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Keeping losses small is a
full time job and takes action on your part. You may ask how do you
keep losses small at all times as you have taken positions and in
minutes the position went massively against you before you got the
fill back. The answer to keep losses small in relation to the size
of your account is to expect the unexpected disaster and limit
exposure from the start of an initial position when the position
has not proven to be correct.
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I want to give you the best
example of what I mean in keeping losses small. I listened to a
trader accurately state that he had 80% of his trades make money. I
watched his trades and judged his trades. When a trade went against
him, he would hold that trade until it became a winner. The 20%
losers were large losses. Yes indeed he was correct in his
statement of having 80% winning trades. His net income was negative
because of not understanding that trading has nothing to do with
what percentage of winners you have.
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Trading has the most
important statement in the end! It is that your income is based on
not how many winners or losers you have but on how small your
losses are of those losers. How large your winners are is second to
how large your losses are.
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I am a very poor percentage
trader in that I lose more trades than I win. I would hate to tell
you exactly the percentage for I am sure you would not even want to
read my input anymore. I am not a good winner but I am the best
loser I know. Losing well is what gives me my income.
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MJ is good in scoring! It
is not always how many shots you take or how high the percentage.
It is the score at the end that actually counts.
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ALS: Ok you have a few
raised eyebrows. I know your percentage and you are correct, as it
would shock most people. I won't divulge it. What do you suggest
traders do in order to use their new shoes in trading?
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POP: Frame of mind is what
we are talking about from the start of a position. Let me say I
have 5-10 grand in an account. Am I to start out to make a fortune
or to continue to survive forever in trading? Of course the trader
and I want both. But keep in mind that without long-term survival
you will never reach the goal of making a fortune. So survival is
the more important of the two. Let us devise a way to accomplish
that.
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We will use soybeans as an
example. If I put a 5,000-bushel contract on I can expect to lose
3,000 on a limit move. Notice I said I can expect to lose and did
not say I can expect to make. You see I will not limit my gains as
I will be able to hold gains longer than losers. Notice I also said
expect to lose 3,000 as a limit move is 30 cents but I use the
limit to limit exposure rule. What I am saying to myself is that I
have an exposure upon entry of limit to limit.
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By having a good entry plan
I can reduce the expected loss and by having a good exit plan I can
reduce the loss also. I am not going to have a plan to put a
position on at limit up or down in either direction. Or am I?
Perhaps at times with the use of rule two I will add at limits if I
can but we are talking about initial entry here.
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With a possible worst-case
loss expectation of 3,000 and an account of 5-10 grand we are
looking at 30-60% possible loss from the start. Even so we want to
trade the entry signal in beans.
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What should we do? How
should we trade? First reduce the exposure before putting the trade
on from the start. You can reduce it by trading smaller. You could
trade a one contract of 1,000 on the MidAm exchange. Another method
is to look for an option with say 60 days to go before expiration
and a delta of 20%. In a break out and that is what your entry
should be looking for in a trend, you will have the opportunity to
participate without the trade making a difference in your account.
If you are worst case loss in the first day you will lose 600 and
not 3,000.
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Ok so we have the exposure
to less than 600 of a 5-10 grand account. Next let us reduce the
exposure further by knowing when the position has proven itself
correct. Let us say you are only able to look at the close in the
newspaper at night and must work away from communications to the
floor during the trade part of the day. Your entry is now more
important. If you position in the top possible third of a market or
the bottom third in that direction, you are allowing almost the
entire risk of 600. By having a good trade plan which does not
allow you to position the top third of a possible trade range you
will reduce your risk by 1/3rd. In this case your allowed risk is
now 400 at most.
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Yes you will miss some
moves by not buying the top third or selling the bottom third of a
days possible range but the survival aspect is worth the lost
trade. This also keeps you from chasing a market, as we know
markets have highs, lows and ranges each day. Use it to your
advantage by not chasing markets into the hole even if you miss the
trade at the cost of long term survival.
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The next part of your entry
is to limit your loss possibility. There are positions that during
a day should be removed for the sake of protection of being limit
locked into a larger possible loss the next day. You are going to
have to accept the fact often events can take a market limit one
way or the other and at times they will reverse from that limit.
You must never allow yourself to be locked limit against your
position. The only way of doing that is to have a plan to remove
the position before it happens.
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If you are long in beans
and the market is in the bottom 5-10 cents of the possible range
for the day, you had better have a plan for removing the position
even with the possibility of the market recovering after you get
out. Let us say you went long ten cents higher and now the market
is 30 cents lower and only ten cents above limit down. Since your
plan says not to sell the bottom third for entry the only reason
for selling is to limit your losses. At what point do you give up
the opportunity of recovery in a position now showing bad? When the
market in beans has moved within ten cents of limit you can pretty
well accept the fact that any recovery is going to be a fluke most
of the times. We will consider the bottom ten cents too much risk
against us so our plan could be to exit on a stop when the market
is in the top or bottom ten cents against us.
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This ten cents on exit with
a stop can reduce our risk now by another ten cents. So now we have
a total possible loss of 300. This is 1/10th of the original size
contract risk. We are talking maximum loss of 3-6% of our account
size at this time. This we can live with.
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By having several trades
working and with much smaller size your odds of removal from the
game will diminish but you must have a plan for each position.
Looks more like work doesn't it? Yes it is work but it pays off in
the end.
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Keep in mind the above
example can be suited to your trading but keep your initial
position small enough so it won't have a chance of affecting you
emotionally or financially in your trading. Your new shoes are your
expectation of taking that loss many times but controlling your
size of loss.
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How much will you make? Who
knows? Better yet who cares? It is when you don't care how much you
can make that you will better serve the aspect of how much you can
lose and how much will you lose. Only then can you judge whether
you can control your account properly.
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Nothing precludes the
importance of having trades that will give you the positive
expectation of outcome. You won't take any trades unless you can
have a positive expectation of being able to gain more than you
lose.
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I am only pointing out to
you that a high expectation of winning trades over losing trades
will point you in the direction of larger draw downs and worst of
all holding trades for too long when not good trades.
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Limit your thinking on
trades to limiting losses at all times. If you trade small enough
and decide you are going to try and lose 300 on every example of
the bean trade but follow rules one and two correctly, do you think
you could do it? I mean lose 300 on every trade. Of course you
couldn't lose 300 on every trade unless you have a real bad trade
program and entry signal.
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Most traders think the
other way of trying to make 300 on every trade and then the losses
become larger than any possible gain. Not only the larger losses
but the failure to add to correct positions is
overlooked.
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I challenge your thinking
on trading as a game of limiting your losses! By properly knowing
your worst case loss you can actually do better than you think
because your trade plan also has a criteria of telling you when you
have a proven correct position based on market conditions. This
means that often times you are taking even smaller losses than the
worst case and sometimes removing positions which don't prove to be
correct at a gain.
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ALS: Phantom I know you
wanted to bring up many points and I know you have given a time
limit on this. We will continue to drive down the road and look at
the signs along the way from our traders. It was great to be able
to get together on this again. What are your plans
forward?
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POP: Art, I intend to watch
the forums, the web sites, complete my other projects and when time
permits to continue what we started with our traders! No time limit
but I do request patience from the readers and our great
traders.
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I would like to change the
image I gave our wonderful trader friends. I have learned so much
from them and what I hold highly from them is their loyalty. So
much good input from all of them. I don't want to leave anyone out
so I won't name them. I know that seems like a cop out but it
isn't.
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If only traders can imagine
how important it is to being a good loser than we shall see many
more Phantom's appear in the future. I am beginning to see a few
already.
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For those of you worrying
about the year 2000 problem, hexadecimal is a base 16 rather than
base 10 number system that works in many situations. There are many
solutions to the problem and I hope this gives you a lead on 2000
thinking. 256 is a larger year base than 100 and with just a
conversion program in assembly will correct many software problems.
They are talking billions on this problem. Go get some of it and
then trade big time!
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" You
must concentrate at all times on keeping your losses small and
never on what you expect to make but on what you expect to lose.
"
---POP
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